It was a great and really relaxing vacation (which is not self-evident if you have three little boys). So I am ready to move again. If I look at the government bond markets, I get the same impression: They have been on vacation lately but appear relaxed and ready to move. In turn, I update my neutral tactical outlook back to bullish again.
On July 8 (see: Rates Strategy Update: digging below the surface), I adopted a neutral tactical outlook. Timing-wise, however, I first thought that the corrective period might be over by the end of July but subsequently revised that view (see Market Update: near-term risk-recovery not over yet): 'Overall, it seems that the near-term risk-recovery can run further which means that bond prices will also correct lower. While I previously expected this period to be over by the end of this month, there is a clear risk that it might last a bit longer. However, the medium term outlook remains subdued and a renewed period where risky assets and government bond yields move lower - most likely for a prolonged period with more pronounced losses - is likely to start sometimes during August. Therefore, I reiterate once again that I maintain my strategic defensive asset allocation stance but stick to a reduced risk taking on a tactical basis. The 120 area in the Bund future still looks as a good target to open/add to long duration positions.'
Looking back, the Bund future has formed a double-bottom just below 120 (119.92 on July 27 and 119.96 on August 10). This level corresponds to the 50% Fibonacci retracement of the previous upward movement from June 8 (117.47) to July 8 (122.49) at 119.98. Therefore, technically, the Bund future seems to have formed a bottom at the 120 area. Furthermore, the market appears oversold and in turn ready for a bounce following its 5-weeks pause. In the US, the 10y future has erased almost its entire early June-early July gains. However, it did not trade down to new lows and also here the technical situation looks oversold and ready for a bounce. In terms of positioning, the CFCT data indicate that shorts have grown again, especially in 10s and 30s around late July/early August. Additionally, this week's supply is now out of the way (with yesterday's 30y auction surprisingly strong).
Overall, technicals, positioning and supply all suggest that government bonds have been relaxing and are ready to trade higher again from a tactical perspective.
Fundamentally, I do not see that any material changes have taken place over the past weeks which would stand in the way of my subdued medium term growth outlook (I will provide more details on the short and medium term fundamental outlook next week). Inflation has been coming in below expectations (with more downward pressure on core inflation ahead). On the other side, the consensus for near-term growth prospects has continued to improve and earnings surprises have remained equity market friendly in general (less so the revenue numbers, though). Nominal growth rates promise to remain exceptionally low for quite some time which will help government bond yields to remain low as well. Therefore, I do not see any reason to change my bond-bullish strategic outlook. With bond markets having relaxed over the past weeks, I now upgrade my tactical outlook back to bullish again as 10y UST and Bund yields should be able to fall towards the 3% area in the weeks and months ahead.